It’s not uncommon for the parents of college students to consider buying an investment property near their child’s university. The thought is that their child can live in the unit during college, and the parents will make some money from the real estate venture.
With rare exception, however, this strategy more than likely will end up being a very bad financial decision.
The first rule of property ownership is that to really make any money on a real estate purchase you need to own the property for at least five years — and that timeframe is really just the breakeven point. So if you are not sure you will own the property for at least five years, it probably is a better financial move to skip it. Most students are only in school for four years, so when they leave town and you decide to sell, you’ll lose money.
For example, you buy a property for $150,000 and take out a mortgage for 75 percent, or $112,500. Your cash equity — down payment, loan/closing fees and rehab costs — totals $50,000 (see chart below). If you sold four years later, assuming the sales price increases 3 percent per year, you would barely break even with $48,760 left over after the sale. And more than likely you wouldn’t break even at all.
And what if you can’t sell when your student finishes school? Do you want to own and manage a college rental in a town where no one you know lives?
You might think it would be less expensive to own than rent because your child would collect some rental income from roommates. But after factoring in maintenance, taxes, insurance, repairs and other expenses, it would end up being more expensive. Rarely is owning a property less expensive than renting, especially with the wear and tear from student tenants.
It may sound nice to own a rental property near your child’s school, but short-term ownership is not a good idea. Plus your child should be concentrating on grades and enjoying the college experience. Why add having to be a property manager to the fold.
Let property owners who already are in the student rentals business provide housing for your child and handle the leaky faucets, clogged toilets, vacancies, damage from parties, etc.
Don’t worry; soon enough your child will probably be back into a house you own — and probably the same one they left when they went “away” to college!
- Investing 101: Estimating Rental Property Expenses
- Investing in Real Estate – What Is a ‘Good Deal?’
- Buying? Use This Checklist to Avoid Surprises
Leonard Baron, America’s Real Estate Professor, is a San Diego State University Lecturer, blogs at Zillow.com, authored several books including “Real Estate Ownership, Investment and Due Diligence 101”, and loves kicking the tires of a good piece of dirt! See more at ProfessorBaron.com.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.